CFOs feel financial modeling needs improvement

Long-term care and life reinsurance models could use the most work, CFOs say

CFOs feel confident in their financial modeling but admit there is room for improvement

Sixty-five percent of Chief financial officers (CFOs) from large to midsize life insurance companies feel that their financial modeling results could use improvement.

The finding comes on the heels of a Towers Watson survey that examined varying aspects of financial modeling for life insurers.

The survey, part of Towers Watson’s Life Insurance CFO program, which strives to provide applicable research on trends and issues that are of importance to the North American Life insurance industry, focused on the effectiveness of financial modeling in terms of model governance and business priorities as well as the actual manner in which life insurers utilize financial modeling.

Financial modeling, in some crude form has been used for ages, from abstract hypothesis to the clear-cut contours of quantitative finance applications. With so many CFOs reporting that their financial modeling practices could use improvement, could there be a need for financial models of financial models?

It should be noted, that when dealing with anticipated variables and hypotheses, complete accuracy, by its nature, will always be elusive.

Timeliness appeared to be one of the main issues — only 13 percent said that they were extremely satisfied with the timeliness of their models results while 17 percent reported that they were not at all satisfied. Ninety-one percent of CFOs surveyed reported that they were uneasy with the amount of time required to interpret model results before their teams could actually begin implementing the information yielded by the models.

“Our survey revealed that despite advances made in financial modeling at many life insurance companies, there are ever increasing demands placed on companies by their stakeholders to improve the speed and usefulness of their financial models,” said Cheryl Tibbits, director and life insurance consultant at Towers Watson.

CFOs surveyed reported that the most work needed to be done on long-term care and life reinsurance models with more than half of the respondents saying that they are not at all satisfied with their long-term care modeling and 36 percent saying that their life reinsurance models needed work.

When asked to chose the top three obstacles they faced in extracting needed information from their financial models more than two-thirds named managing competing priorities while 44 percent responded that run-time requirements were the biggest challenge and 39 percent answered model features and functionality. All of the respondents said that their first priority would be run-time requirements.

The survey reported that CFOs have mixed feelings about how they regulate the results of their financial models in order to mitigate against the risk of them adversely informing management decisions. Fifty-two percent of respondents said that model governance process in their organization is somewhat developed while 22 percent said that it was very developed. Contrary to the findings, 65 percent said that they were going to make changes to the governing process of models this year with only 26 percent stating that they would be making no changes at all.

Only 13 percent reported using an outside vendor for their modeling with many life insurance companies relying on an in-house team.

The survey also examined CFOs attitudes towards the actual features and tools employed by financial models and found that 66 percent had confidence in the value of the tools, saying that they would “extract full value” from them.